Wednesday, October 23, 2019

Expressly Unallowable Costs - Raytheon Court of Appeals Decision Broadens the Definition

The U.S. Court of Appeals for the Federal Circuit just upheld Raytheon's appealed a decision by the ASBCA (Armed Services Board of Contract Appeals) that unallowable salary costs associated with Raytheon's lobbying activities were 'expressly unallowable' under FAR 31.205-22 and thus subject to penalty under FAR 42.709-1(a)(1) (known as level 1 penalties).

Raytheon submitted its 2004 incurred cost proposal in 2005. DCAA (Defense Contract Audit Agency) completed its audit in 2006 and found, among other things, over $220 thousand of expressly unallowable lobbying salary costs. In 2011, DCMA (Defense Contract Management Agency) demanded that Raytheon repay the Government for these costs and additionally, assessed a penalty and interest under FAR 42.709-1(a)(1).

Raytheon appealed to the ASBCA and lost on this issue. Its argument was that salary costs associated with lobbying activities were not specifically referenced in FAR 31.205-22 and accordingly, were not "expressly unallowable". The ASBCA upheld the DCMA decision, finding that lobbying costs are subject to penalty because "costs associated with certain named lobbying activities are stated to be unallowable under FAR 31.205-22" and "they are ... expressly unallowable. (That Decision can be accessed here). The ASBCA also noted that FAR 31.201-9(a) and (e)(2) makes salary costs of employees who participate in unallowable activities are also expressly unallowable as directly associated costs of that activity.

Raytheon then appealed the ASBCA decision to the Court of Appeals. Raytheon argued that salary costs of employees who participate in lobbying activities are not expressly unallowable under a cost principle in FAR. Raytheon contended that an item of cost must be mentioned or identified by name to be expressly unallowable and that the generic language of costs associated with lobbying activities is insufficient. The Court of Appeals found no basis for such an interpretation and explains, in detail, why it came to that conclusion (The full Court of Appeals decision can be accessed here).

Perhaps a fallout of this decision will be that the Government may renew its aggressiveness on calling out costs as expressly unallowable and subject to penalties. The penultimate paragraph of the decision reads:
Finally, Raytheon relies on a decision in a prior proceeding where the Board held that neither bonus and incentive compensation costs nor compensation cost is specifically named and stated as unallowable under the cost principle (in FAR 31.205-22), nor are such costs identified as unallowable in any direct or unmistakable terms. That decision is not binding on this court, and in any event, is contrary to the plain language of Subsection 22 to the extent that it concludes that salaries in the form of bonus and incentive compensation for lobbying and political activities are not "expressly unallowable".
After the decision ASBCA decision referenced here, DCAA ratcheted back its guidance on what constitutes expressly unallowable costs. Perhaps we will soon see that guidance amended again.

Tuesday, October 22, 2019

New Guidance on Anti-Trafficking Regulations

FAR (Federal Acquisition Regulations) 22.17 requires Government contractors to work proactively to prevent human trafficking in their supply chains and take remedial steps if such activities are identified. The term 'human trafficking' encompasses many things but in the context of Government contracting, refers primarily to child labor and forced labor. The requirement applies to contracts greater than $500 thousand.

The Office of Management and Budget (OMB) released guidance yesterday to help contractors manage and reduce the burden of meeting their responsibilities. It describes anti-trafficking risk management best practices and mitigation considerations that acquisition officials can take into account when working with contractors to address their obligations.

The new OMB guidance:

  • Reviews key responsibilities of the regulations
  • Highlights best practices that have been shown to contribute to effective deterrence
  • Describes mitigation actions that should be given appropriate consideration by contracting officers in evaluating the suitability of steps taken by a contractor that has reported a trafficking incident and
  • Provides a FAQ section
The FAR regulations (and the underlying statute) contain express prohibitions on certain types of trafficking related activities. These include prohibition on charging employees recruitment fees, and destroying, concealing, confiscating or otherwise denying access to identity or immigration documents. The regulations also require contractors to implement risk management practices such as an employee awareness program, a recruitment and wage plan, and a housing plan. FAR also requires contractors to take appropriate action against employees, agents, or subcontractors that violate prohibitions. Additionally, contractors now have an affirmative duty to report violations to the OIG (Office of Inspector General).

While this new guidance is primarily aimed at contracting officers, the section on best practices contains a good bit of advice on what a contracting officer might consider when assessing contractors' compliance with the anti-trafficking regulations.

Monday, October 21, 2019

Legislation Proposed to Repeal the Davis-Bacon Act (DBA)

Senator Mike Lee (Utah) has introduced (or should we say 're-introduced') legislation last week to repeal the Davis-Bacon Act. Six other Senator's signed on as co-sponsors of the proposed repeal.

The Davis-Bacon Act is a wage subsidy law requiring all federally-funded projects (greater than $2,000) to pay workers the "prevailing wage" rate on non-federal projects in the same locality. The problem with the prevailing wage law is, as everyone knows and understands or at least suspects, that the prevailing wage schedules coming out of the Labor Department, are significantly higher than the real prevailing wages. To illustrate with an anecdote, a plumber working for $33 per hour on new residential construction, was temporarily deployed by his employer to a project at a local military installation where he earned more than $40 per hour. After the military job was completed, he returned to his previous job site and began working again at $33 per hour.

According to Senator Lee's press release announcing the legislation,
The Davis Bacon Act exemplifies how big government hurts the people it purports to help, gives unfair advantages to favored special interests (e.g. unions), and squeezes the middle class. The Davis-Bacon Repeal Act would remove these government-imposed obstacles to economic opportunity facing low-skilled workers, and return wasted taxpayer dollars back into the hands of the American people.
There is no doubt that Federally funded construction projects would cost less without the prevailing wage law. However, we don't expect the proposal to get very far in Congress. Also, the Labor Department's Wage and Hour Division (WHD) would lose half its case load.

Read more about the proposal here.

Friday, October 18, 2019

Should You Insure Government Property in Your Possession?

Continuing on with our discussion of insurance costs and the allowability of such, we move now form our discussion of self-insurance to a few other types of insurance that have conditions upon whether associated costs are allowable.

Many Government contractors have Government property in their possessions for various reasons - usually temporary. The question often arises over whether the risks of loss of Government property should be insured and then if insured, whether the costs are allowable. FAR 31.205-19(e)(2)(iv) answers that question. FAR states that the cost of insurance for the risk of loss, damage, destruction, or theft to Government property are allowable only when three conditions are met:

  1. the contractor is liable for such loss, damage, destruction or theft
  2. the contracting officer has not revoked the Government's assumption of risk (in accordance with FAR 45.104(b). The contracting officer can revoke the Government's assumption of risk when the property administrator determines that the contractor's property management practices are noncompliant with contract requirements, and
  3. such insurance does not cover loss, damage or destruction which results form willful misconduct or lack of good faith on the part of any of the contractor's management personnel. Contractor's managerial personnel are defined in FAR 52.245-1(a) as directors, officers, managers, superintendents, or equivalent representatives who have supervision or direction of the company's business, plant, or separate location.

DFARS (Defense FAR Supplement) adds one other consideration to the allowability question. DFARS 231.205-19(e)(7) states that in addition to the FAR limitations listed above, the allowability of insurance costs are also subject to other limitations. These limitations are listed in DFARS 252.217-7012 and essentially related to contractor negligence.

The key to ensuring the allowability of insurance costs related to Government property is to maintain close coordination with your contracting officer as to what is insurable and to make sure your internal controls over Government property in your possession are adequate.

Thursday, October 17, 2019

Motions for Reconsideration of Previous Decisions

A 'motion for reconsideration' asks the judge to reconsider his/her decision in light of other facts, circumstances, or law that wasn't brought up in the original hearing on the matter.

In the context ASBCA (Armed Services Board of Contract Appeals) decisions, Rule 20 allows such motions to be filed by either party and must set forth specifically the grounds relied upon to grant the motion. Motions must be filed within 30 days of receiving the Board's decision. Opposing parties have 30 days after a motion has been filed to file any cross-motion for reconsideration. Extensions to these times are not granted.

It is well established that motions for reconsideration are not granted lightly. In order to prevail on a motion for reconsideration, a contractor or the Government must demonstrate a compelling reason for the Board to modify its original decision. There are three bases upon which the ASBCA will reconsider a previous decision:

  • Newly discovered evidence
  • Mistakes in finding of fact
  • Errors of law.

Motions for reconsideration are not intended to provide either party, the contractor or the Government, with another chance to again argue its position that was previously raised and denied. In some decisions where motions for reconsideration have been heard, the ASBCA is highly critical of parties that try to do just that - rehash the same arguments.

The probability of success in filing motions for reconsideration are slim. A brief scan of ASBCA decisions involving motions for reconsideration during the last couple of years found none that were not denied. There was one case where the Government argued that an opinion included factual errors as well as legal errors that stemmed from the factual errors. The ASBCA agreed that its decision included one factual error but it viewed the error as immaterial in the circumstances so denied the motion for reconsideration.

Wednesday, October 16, 2019

Self-Insurance Plans - What Contract Auditors Will Look For

When submitting request for self-insurance plans to the contracting officer, contractors are required to provide, among a long list of other documents, self-insurance feasibility studies or insurance market surveys reporting comparative alternatives, loss history, premiums history, and industry ratios. The point of this is to insure that the costs of self-insurance does not exceed the cost of purchased insurance. Excess self-insurance costs exceeding the cost of comparable purchased insurance is unallowable under FAR 31.205-19(c)(3):
If purchased insurance is available, any self-insurance charge plus insurance administration expenses in excess of the cost of comparable purchased insurance plus associated insurance administration expenses is unallowable.
DCMA (Defense Contract Management Agency) has the responsibility under FAR 42.3 for reviewing contractors' insurance coverage. Those reviews are usually limited to verifying that the contractors' insurance program provides appropriate protection in consonance with the types of risks involved. Such reviews, by themselves, do not constitute a sufficient basis for accepting related costs. That's where DCAA (Defense Contract Audit Agency) or other independent contract auditors come in.

When reviewing a contractor's self-insurance program, contract auditors will consider whether the contractor has performed regular (and recent) comparative cost analysis of the self-insurance program with comparable purchased insurance costs. While the contracting officer may have initially approved a contractor's self-insurance plan, after time, the comparative analysis initially submitted may no longer be relevant. And here's where some contractor's have run afoul of the audit process - they have no evidence to show that its self-insurance plan(s) remain cost effective. That is, the costs plus administration expenses for self-insurance, do not exceed the costs of comparable purchased insurance.

Contract auditors will review other aspects of self-insurance plans as well, such as;

  • The types of risks covered and the nature of contractors' risk assumptions
  • Effectiveness of the claims procedures. For example, are there procedures in place to ensure that payments are made only to valid participants? Children eventually age out and should be removed from participation. In the case of divorce, the spouse should be removed from participation.
  • Equity of the accounting treatment of self-insurance costs including how the costs are allocated to final cost objectives.
  • Maintenance of the reserve in accordance with CAS 416 (if applicable).
Self-insurance can save contractors a lot of money. But self-insurance plans must be closely monitored to ensure that the costs meet the requirements of FAR 31.205-19 and that claims are not paid out to ineligible participants or for events that are not covered by insurance.

Tuesday, October 15, 2019

FAR Provisions Covering Self-Insurance

Many Government contractors have elected to provide coverage for certain risks from their own resources under a program of self-insurance. A decision to self-insure is typically based on a determination that coverage can be provided by self-insurance at a cost not greater than the cost of obtaining equivalent coverage from an insurance company, or in the case of workers compensation, a State fund. That makes some sense. With self-insurance, a contractor is not paying for the insurance company's profits. The larger the company, the more cost effective it is to be self insured since there is a much larger workforce to spread the risks.

Even with self-insurance programs, contractors will carry or maintain various forms of purchased insurance to cover major risks and catastrophic losses. For example, under a self-insured health plan, contractors will usually limit its self-insurance to routine hospital, surgical, and medical expenses and, at the same time, purchase insurance covering life, accidental death and dismemberment, disability income benefits and dreaded disease coverage.

Accounting for self-insurance programs requires a level of precision that is not so easy to estimate. Under a self-insurance program, a contractor must make a charge for each period (i.e. monthly). This charge must represent the projected average loss for that period. How does one project an average loss for a period? Obviously contractor's need good historical data and a sense of what might happen in the future.

Self-insurance charges plus insurance administration expenses may be equal to, but cannot exceed the cost of comparable purchased insurance (see FAR 31.205-19(c)(3)). This is where some contractors run afoul of contract auditors because they don't know, or haven't determined the cost of purchased insurance.

FAR 28.308 requires contractors to submit self-insurance programs to the contracting officer for approval when 50 percent or more of the self-insurance costs to be incurred at a segment will be allocated to negotiated Government contracts and are expected to exceed $200 thousand per year. That same FAR provision includes a list of what is required in the submission for contracting officer approval.

Tomorrow we will look at some of the things a contract auditor might review when it comes to self-insurance costs.

Monday, October 14, 2019

Contractor Pays Nearly $1 Million in Back Wages for Labor Law Violations

A division of the Labor Department, this time the Wage and Hour Division (WHD), announced the results of its investigation of General Atomics for compliance with Federal labor laws. The company, a California-based contractor providing aircraft systems and services to the Army, agreed to pay nearly $1 million to 1,100 employees for violating the Service Contracting Act (SCA).

According to the Labor Department, General Atomics failed to pay prevailing wages and required health and welfare benefits to employees performing services under several Government contracts. General Atomics paid aircraft mechanics and engineering technicians at hourly rates below the SCA minimums and also failed to pay minimum fringe benefits required by the SCA.

In making the announcement, the Labor Department reminded employers doing business with the Federal Government that they need to understand and abide by all applicable laws and to ensure that employees receive legally required pay and benefits. Easy to say but difficult to implement, we suppose.

Friday, October 11, 2019

Improper Business Practices - Contingent Fees

This is the fifth installment in our periodic series on improper business practices under FAR (Federal Acquisition Regulations) Part 3. FAR Part 3 includes sections on the prohibitions of gratuities to Government personnel, contingent fees, subcontractor kickbacks, buying-in and antitrust matters. It also offers whistleblower protections to contractor employees, requires contractors to establish and implement codes of business ethics and conduct, and more.

In Part 1, we discussed the requirement for contractors and subcontractors to implement reasonable procedures to prevent and detect violations of the Anti-Kickback Act. In Part 2, we discussed the practice of "buying in" and tools for contracting officers to use to prevent subsequent cost growth when contractors do buy in. In Part 3, we discussed the prohibition against offering gratuities to Government personnel, a prohibitions that should be rather obvious to everyone. In Part 4 we alerted you to practices that might be reportable as violations of antitrust laws and contracting officers affirmative duty to report "suspected" violations of anti-trust  laws. Today we will be discussing the prohibitions against contingent fees.

What are contingent fees? Contingent fees are broadly defined in FAR as any commission, percentage, brokerage, or other fee that is contingent upon the success that a person or concern has in securing a Government contract. Contractors' arrangements to pay contingent fees for soliciting or obtaining Government contracts have long been considered contrary to public policy because such arrangements may lead to attempted or actual exercise of improper influence. Contractors are required to certify in each negotiated procurement that they have not paid any contingent fees.

There is one limited exception to the payment of contingent fees. Contingent fee arrangements between contractors and their bona fide employees are permissible.

 Like other violations of described in this series, contracting officers have an affirmative duty to report suspected violations of this prohibition. Misrepresentations or violations can lead to one or more of the following:

  • If before award, a bid will be rejected.
  • If after award, the Government can annul the contract or recover the fee.
  • Additionally, the Government can suspend or debar the contractor from future contracts.
  • Refer suspected fraudulent or criminal matters to the Justice Department.

Thursday, October 10, 2019

Expansion of Definition of Commercial Item

FAR (Federal Acquisition Regulation) was amended today to expand the definition of "commercial item". The definition heretofore has been written broadly to include seven different scenarios or situations. Now there's an eighth. The eighth and newest category of commercial items reads as follows:
A non-developmental item, if the procuring agency determines the item was developed exclusively at private expense and sold in substantial quantities, on a competitive basis, to multiple State and local governments or to multiple foreign governments.
The first question when reading this definition is what is a "non-development item". Well, FAR has a definition for that as well. In FAR 2.101, we read:
A non-developmental item (NDI) means:
  • Any previously developed item of supply used exclusively for governmental purposes by a Federal agency, a State or local government, or a foreign government with which the United States has a mutual defense cooperation agreement
  • Any item described above that requires only minor modification or modifications of a type customarily available in the commercial marketplace in order to meet the requirements of the procuring department or agency
  • Any item of supply being produced that does not meet the requirements above solely because the item is not yet in use.
Like any commercial item procurement, contractors should not assume that a contracting officer will know or would likely consider whether an item being offered qualifies as a commercial item. Offerors should be ensure that such distinctions are highlighted.

This change to FAR was necessitated based on a provision in the 2018 NDAA. FAR Part 12 creates a preference for buying commercial items and provides relief from certain record-keeping, reporting, and compliance requirements. According to an analysis performed by the Section 809 Panel, commercial acquisitions are subject to 138 contract clauses while acquisitions for NDI that do not meet the commercial item definition as well as acquisitions for noncommercial items could be subject to nearly 500 clauses, including TINA (Truth in Negotiations Act) which has long been recognized as one of the most costly statutes and regulations in Federal procurement.

The full text of the expanded definition of "commercial item" is available here.

Wednesday, October 9, 2019

GAO to Study DOE's Acquisition Workforce and Audit Needs

The Senate Committee on Armed Services released a report to accompany its 2018 NDAA (National Defense Authorization Act). The Senate and the House versions of the NDAA are currently in conference committee to resolve differences before going to a vote by the full chambers. The Committee report offers some insight into why the Senate added various provisions to the NDAA. One of the provisions called out in the NDAA (Senate version) is for the GAO (Government Accountability Office) to review the applicability of the Section 809 Panel to the Department of Energy. We last discussed this back in July (see NDAA 2020 - Study the Applicability of Section 809 Panel Recommendations to Energy Department) so today's blog represents a refresher and update to what we wrote previously.

Section 809 of the 2016 NDAA required DoD to establish an advisory panel on streamlining and codifying acquisition regulations for the Department of Defense. Between January 2018 and January 2019, the Section 809 Panel (as it came to be called) issued several reports containing recommendations related to improving the defense acquisition process. While these recommendations were not aimed at the Energy Department, the Senate Armed Services Committee believes that DOE face a number of the same acquisition challenges as the DOD. That is why the Committee inserted the requirement for GAO to assess the application of a subset of these recommendations to DOE.

If enacted, the GAO will be directed to review issues affecting DOE's acquisition workforce. Specifically, the Armed Services Committee is interested in DOE's workforce planning efforts related to (i) how DOE determines the number of acquisition professionals needed and the skills and training required for those positions, (ii) whether DOE's acquisition professionals attain the needed training and skills, (iii) any challenges in recruitment and retention of DOE's acquisition workforce, and (iv) any systemic challenges for those professionals in performing their acquisition oversight responsibilities.

Volume 1 of the Section 809 Panel's final report provides examples of essential audit and non-audit services provided by DoD agencies across the contract life-cycle. Most of these services are performed pursuant to requirements in FAR (Federal Acquisition Regulation), which are generally applicable to all agencies, including the DOE. The Senate Armed Services Committee wants GAO to review how the DOE obtains the required audit and non-audit services and whether there are opportunities for improvement or efficiency in how the DOE obtains these services. Up until six or so years ago, DOE acquired its contract audit services through DCAA (Defense Contract Audit Agency) after which it began contracting with commercial accounting firms for the service. Whether the switch was beneficial to the Government is a question that the GAO will try to assess.

Tuesday, October 8, 2019

How Much Time Does it Take to Comply with CAS Administration Requirements?

Contractors that must comply with CAS (Cost Accounting Standards) are required to submit notifications and descriptions of certain cost accounting practice changes, including revisions to their Disclosure Statements if they're required to have Disclosure Statements (see FAR 52.230-6, Administration of Cost Accounting Standards). In addition, contractors are required to submit a cost impact statement assessing the impact of accounting changes on Government contracts.

Cost accounting changes are usually implemented to improve the allocation of costs to final cost objectives. An example is where a contractor changes the manner in which it charges IT costs from inclusion in the G&A (General and Administrative) pool to a base that includes non-production headcount on the theory that non-production headcount are the predominate users of IT systems and support.

As any CAS-covered contractor can attest to, the resources required to comply with the CAS administration contract clause is significant. How significant you ask? Well, the Government estimates that collectively contractors spend 314,475 hours per year to comply. That works out to 175 hours for each of the 600 CAS covered contractors required to comply, or roughly, a month's worth of labor for each contractor.

Is this money well spent? In most cases, some or most of the funds required to prepare these notifications are simply passed on to the Government anyway. So the real question is whether the Government is getting a level of benefit commensurate with the extra cost of compliance. We know from experience, that many of these notifications, once received by the contracting officer, end up in the dead-letter file - no Government action is ever taken.

Monday, October 7, 2019

Improper Business Practices - Antitrust Violations

This is the fourth installment in our periodic series on improper business practices as laid out in FAR (Federal Acquisition Regulations) Part 3. FAR Part 3 includes sections on the prohibitions of gratuities to Government personnel, contingent fees, subcontractor kickbacks, buying-in and antitrust matters. It also offers whistleblower protections to contractor employees, requires contractors to establish and implement codes of business ethics and conduct, and more.

In Part 1, we discussed the requirement for contractors and subcontractors to implement reasonable procedures to prevent and detect violations of the Anti-Kickback Act. In Part 2, we discussed the practice of "buying in" and tools for contracting officers to use to prevent subsequent cost growth when contractors do buy in. In Part 3, we discussed the prohibition against offering gratuities to Government personnel, a prohibitions that should be rather obvious to everyone. Today we will focus on practices that might be reportable as violations of antitrust laws.

The antitrust laws are intended to ensure that markets operate competitively. Any agreement or mutual understanding among competing firms that restrains the natural operation of market forces is suspect. There are known behavior patterns that are often associated with antitrust violations. These 'indicators' are not necessarily improper by themselves but are sufficiently questionable to warrant a referral to "appropriate authorities", which for DoD is probably of the Office of Inspector General.

  1. The existence of an industry price list or price agreement to which contractors refer in formulating their offers
  2. A sudden change from competitive bidding to identical bidding.
  3. Simultaneous price increases or follow-the-leader pricing
  4. Rotation of bids or proposals, so that each competitor takes a turn in sequence as low bidder, or so that certain competitors bid low only on some sizes of contracts and high on other sizes.
  5. Division of the market so that certain competitors bid low only for contracts awarded by certain agencies, or for contracts in certain geographical areas, or on certain products, and bid high on all other jobs
  6. Establishment by competitors of a collusive price estimating system
  7. The filing of a joint bid by two or more competitors when at least one of the competitors has sufficient technical capability and productive capacity for contract performance.
  8. Any incidents suggesting direct collusion among competitors, such as the appearance of identical calculation or spelling errors in two or more competitive offers or the submission by one firm of offers for other firms.
  9. Assertions by the employees, former employees, or competitors of offerors, that an agreement to restrain trade exists. Such assertions are not unusual in this age of whistleblowing.

When these or similar conditions are noted or suspected, contracting officers are required to report them. FAR Part 3 also includes specific reporting requirements. It is unlikely that contract auditors (e.g. DCAA or Defense Contract Audit Agency) would ever be in a position to identify suspected violations of antitrust laws as auditors are not typically involved in the award of competitive procurements. But the contracting officers and associated personnel are taught to be aware of such violations.

Friday, October 4, 2019

FAR Proposal to Restrict the Use of LPTA Source Selection

The FAR (Federal Acquisition Regulations) have issued a proposed regulation to limit the use of LPTA (Lowest Price Technically Acceptable) source selection criteria in many circumstances. This proposal is based on provisions in the FY 2019 NDAA (National Defense Authorization Act), specifically, Section 880.

LPTA source selection methodologies are widely used throughout the Government and one of the easiest ways to award contracts. Some have referred to LPTA as the lazy man's guide to contracting because the Government needs only to determine whether a bid is technically acceptable. After that, the lowest price wins.

There has been a growing realization within the Government however that the use of LPTA in many cases, denies the Government the benefits of cost and technical trade-offs in the source selection process. A contractor that is able to add enhancements to its 'product' or 'service' that exceeds minimum specifications, should be given consideration for those enhancements if they would prove useful to the Government.

The proposed regulation will significantly reduce the use of LPTA source selection. In fact, the requirements for using LPTA are conditional on meeting the following requirements:

  1. An executive agency is able to comprehensively and clearly describe the minimum requirements expressed in terms of performance objectives, measures, and standards that will be used to determine acceptability of offers
  2. The executive agency would realize no, or minimal, value from a contract proposal exceeding the minimum technical or performance requirements set forth in the solicitation (good luck justifying this condition).
  3. the proposed technical approaches will require no, or minimal, subjective judgment by the source selection authority as to the desirability or one offeror's proposal versus a competing proposal.
  4. The executive agency has a high degree of confidence that a review of technical proposals of offerors other than the lowest bidder would not result in the identification of factors that could provide value or benefit to the executive agency.
  5. The contracting officer has included a justification for the use of an LPTA evaluation methodology in the contract file; and
  6. The executive agency has determined that the lowest price reflects total costs, including for operations and support.

Additionally, section 880 requires that the use of LPTA source selection criteria be avoided, to the maximum extent practicable, in procurements that are predominantly for the acquisition of:

  • information technology services,
  • cyber-security services,
  • systems engineering and technical assistance services,
  • advanced electronic testing,
  • audit or audit readiness services,
  • health care services and records,
  • telecommunications devices and services, or
  • other knowledge-based professional services.

Thursday, October 3, 2019

Proposed FAR Rule to Increase TINA Threshold to $2 Million

Section 811 of the 2018 NDAA (National Defense Authorization Act) increased the TINA (Truth in Negotiations Act) threshold from $750 thousand to $2 million. This threshold marks the point at which contractors must certify that the cost or pricing data they submit in support of a pricing action is current, complete, and accurate.

In May 2018, the Defense Department issued a class deviation to implement the new threshold for contracts awarded after July 1, 2018, The Civilian Acquisition Council issued a similar class deviation shortly thereafter, applicable to non-DoD contracts. In both cases, modifications to contracts awarded prior to that date were subject to the old lower threshold.

The FAR councils have just issued a proposed regulation that will make these class deviations permanent. The proposed regulations does not significantly differ from the provisions of the temporary class deviations which everyone has been operating under for the past 15 months.

The Government's estimate of cost savings that will result from this threshold is interesting, if true. The Government estimates that savings accruing to contractors will average $41 million per year and savings to the Government will average $6 million annually. Those figures represent the reduced work required to ensure the accuracy of cost or pricing data.

The full text of the proposed regulation can be accessed here.

Wednesday, October 2, 2019

DoD Ethics and Anti-corruption Act of 2019 - Part 2

Yesterday we briefed some of the contents of the proposed DoD Ethics and Anti-corruption Act of 2019. The legislation, if enacted, would create a four-year waiting period between the time an mid-level Government employees and higher could go to work in any capacity for a 'giant' contractor (a giant contractor being one with $1 billion in sales to DoD and DOE. If you missed that article, please refer to Part 1 of this series. There are several other aspects to this proposed legislation that might be of interest to Government contractors that we should briefly mention.

Section 102 of the proposed legislation lays out new annual reporting requirements for contracts greater than $10 million. Contractors will need to file reports that names of certain persons to which they paid some form of compensation within four year of those persons leaving the Government. Those persons include members of the Senior Executive Service, officers retiring at O-6 (Colonel) or higher, and any program manager, deputy program manager, procuring contracting officer, administrative contracting officer, source selection authority, member of the source selection evaluation board, or chief of a financial or technical evaluation team.

The report must list the department where the people served in DoD and their position and the extent they were involved in any acquisition greater than $10 million. But the requirements become much more onerous if the contractor is paying the individual(s) as non-employees. The report must then list each specific issue for which the contractor, any employee of the contractor, or any lobbyist paid by the contractor engaged in lobbying activities directed at DoD and for each lobbying activity, a listing of documents prepared, meeting attended, phone calls made and all electronic communication. That will become an administrative nightmare.

Finally the kicker, the proposed legislation will require DoD to make these reports publicly available on an internet website. Some call this transparency. Others call it intrusion. One thing for certain, it will drive down the market prices for retired Generals.

The full text of the proposed legislation can be accessed here.

Tuesday, October 1, 2019

DoD Ethics and Anti-corruption Act of 2019 - A Bill

Last month, Rep. Speier from California introduced H.R. 4277, the Department of Defense Ethics and Anti-corruption Act of 2019. This Bill contains a number of provisions that will be of interest to Defense contractors.

Section 105 of the Bill would institute a four-year ban on hiring former senior officials by "Giant" defense contractors. Giant defense contractors are contractors that received an average of more than $1 billion in aggregate annual revenue from (i) the DoD or (ii) the Department of Energy for contracted work related to the U.S. nuclear program, in the previous three fiscal years.

Officials in the context of this prohibition include supervisor positions GS-15 and above, SES position, Executive Schedule positions and any military officer Grade O-6 (Colonel) and above.

This prohibition is to be implemented by contract clause and would prohibit giant contractors from hiring or paying (including as a consultant or lawyer) these (former) officials for a minimum of four years after they leave service with the DoD. The manner in which this Bill is worded prohibits payments regardless of whether the compensation is claimed on Government contracts or excluded from contracts.

There are several other provisions of this proposed legislation that will potentially affect Government contractors. We will look at those tomorrow.

The full text of the Bill can be accessed here.

Monday, September 30, 2019

Fines and Prison for Contractor Employee Accepting Kickbacks

How well do you know your employees? Can you vouch for their honesty and integrity? Do you have adequate internal controls to detect and prevent employees receiving kickbacks from suppliers and subcontractors? Do you have sufficient controls to ensure that employees do not have conflicts of interest with suppliers and subcontractors? Here's a case where deficient internal controls led to known losses of $1.4 million and perhaps much more.

A construction company with contracts at Picatinny Arsenal and Ft. Dix employed James Conway as a regional manager to oversee those contracts. Mr. Conway also (secretly) owned his own company, Walsh Construction. For six years up until 2015, Mr. Conway steered subcontracts to Walsh Construction. To conceal his ownership of Walsh Construction, Conway signed the subcontracts as Keith Walsh, the purported owner and vice president of Walsh Construction. There was, in fact, no person by that name who owned or was the vice president of Walsh Construction.

Conway used Walsh Construction to obtain payments from his employer by submitting invoices and bills on behalf of Walsh Construction. Many of the bills included charges for work that Walsh Construction only partially completed or for work not performed by Walsh at all.

Conway, according to the Justice Department press release covering this investigation, also accepted kickbacks totaling $180 thousand from four other subcontractors, knowing that the subcontractors expected, in return, to obtain favorable treatment from Conway.

Mr. Conway has been ordered to pay restitution of $1.4 million and will be spending the next 28 months in prison.

How could this have been avoided? A couple of easy things for starters. Someone should have been reviewing Mr. Conway's purchase order requests and verifying that the work was necessary and that the negotiated prices were reasonable and based on competitive procurements. Second, someone at the construction sites should have been reviewing invoices to validate that the services were indeed rendered. Third, the accounts payable department should have been performing three-way matches; purchase orders, invoices, and evidence of services rendered.

Obviously in this case, Mr. Conway, the regional manager, was given a lot of latitude and very little oversight in carrying out his responsibilities.

Friday, September 27, 2019

Claim for Costs Incurred During Stop-Work Order Denied by the ASBCA

In December 2017, the Army awarded a contract for information technology support services to Advanced Global Resources (AGR). A few days later, the award was protested to the GAO (Government Accountability Office) so the Army issued a stop-work order (SWO) pending the outcome of the protest. After GAO denied the protest, the Army lifted the stop-work oder. AGR then filed a claim for direct costs it expended during the stop-work order period plus extended home office overhead costs.

The day after contract award, AGR entered into an employment contract with Mr. McKissick. A week later, the Army issued its stop-work order which stated, in part, that AGR was not authorized to purchase materials or services until further notified and to stake all reasonable steps to minimize incurring costs associated with the stop-work order.

Eventually the protest was denied and on March 26, 2018 the Army lifted the stop-work order and advised that AGR was free to start the process of obtaining a clearance to manage cleared personnel. It took an additional two months for AGR to receive its clearance.

During the stop-work order period, AGR continued to pay Mr. McKissick's salary even though the employment agreement allowed the company to release him, furlough him, or put him on unpaid leave. Additionally, during the stop-work order, AGR continued to pursue other opportunities, bidding on at least six requests for proposals, winning one of them.

AGR filed a claim for the direct wages paid to Mr. McKissick during the stop-work period as well as unabsorbed overhead. AGR appealed to the ASBCA. The Army asserted that AGR was not entitled to the direct costs because it failed to minimize costs during the stop work period and was not entitled to unabsorbed overhead because the performance period was not extended as a result of the order. Additionally, AGR was not on standby, not subject to a delay of indefinite duration, was not required to be able to resume work immediately at full speed and did not demonstrate that it was impractical for it to obtain replacement work.

The ASBCA sided with the Government and denied AGR's claim. You can read the full decision here.

Thursday, September 26, 2019

DoD Adds "Value Analysis" as a Factor in Determining Price Reasonableness

DoD is proposing to revise its FAR (Federal Acquisition Regulations) Supplement to implement provisions contained in the 2017 NDAA (National Defense Authorization Act) to address how contracting officers may require offerors to submit relevant information to support market research when acquiring commercial items.

Agencies must conduct market research to support the determination of price reasonableness of commercial items. Sometimes however, market research comes up empty with nothing to support the reasonableness of the prices an offeror is proposing.

This new rule will not impose any new requirements on offerors but will allow offerors to submit information or analysis relating to the value of a commercial item to aid in the Government's determination of the reasonableness of the price of those items. Contracting officers in turn, may consider such information or analysis, in addition to any other information available in justifying price reasonableness.

This proposed rule introduces a new term; 'value analysis'. Value analysis means a systematic and objective evaluation of the function of a product and its related costs, whose purpose is to ensure optimum value. Value analysis is used to understand what features or characteristics of a given product or service, or offered terms and conditions warrant consideration as having legitimate value to the Government. A contracting officer may consider such information or analysis in addition to the information required to be submitted. 

Read more about this proposed rule here. Note that the proposal directs the reader to a PGI (Procedures, Guidance, and Information) reference for additional guidance on the use of value analysis that has not yet been published.

Seems like this is a good opportunity for offerors to inform contracting officers of any added value of the commercial items beyond the essential or basic Government requirements.

Wednesday, September 25, 2019

Three Companies Agree to Pay $630 Thousand to Settle Labor Related Violations

The Labor Department has been busy lately prosecuting companies for discrimination, and failing to pay prevailing wages. Last Monday, the Department rolled out three separate press releases detailing the findings of their investigations.

In the first case, a contractor agreed to pay $350 thousand in back wages to 185 female applicants to settle allegations of hiring discrimination found during a routine investigation by the Department's Office of Federal Contract Compliance Programs (OFCCP). The press release doesn't explain exactly what the contractor did to lead to OFCCP's conclusions other than the firm discriminated against females during the hiring process.

In the second case, an investigation by the Labor Department's Wage and Hour Division (WHD) led to a $40 thousand settlement for violating SCA (Service Contracting Act) prevailing wage requirements. The security contractor failed to pay required vacation, holiday, and health and welfare benefits to employees performing work on a FEMA contract. The contractor also violated FLSA (Fair Labor Standards Act) record keeping requirements.

The third case also investigated by WHD, involved a Navy contractor in Honolulu who "erroneously" classified workers as laborers while they performed the duties of more highly skilled and higher paid positions such as boilermakers and painters. As a result, the company failed to pay employees the correct prevailing wages rates under the Davis-Bacon Act (DBA). The company agreed to pay $239 thousand to 47 employees to settle the allegations.

The Labor Department has a solution to falling afoul of its rules and regulations:
Government contractors must familiarize themselves with all employee pay and benefits requirements. The (Labor Department) encourages employers and employees to contact us if they have questions about how workers must be paid for regular and overtime wages, and fringe benefits on federal contracts. They can also consult the numerous resources we offer online to help them understand their responsibilities.
Ah yes, the old "I'm from the Government and I'm here to help you" line.

Tuesday, September 24, 2019

NDAA 2020 - Eliminating the Defense Cost Accounting Standards Board

Section 820 of the 2016 NDAA created the Defense Cost Accounting Standards Board, an independent board within the Office of the Secretary of defense. This provision was later codified as 10 USC 190. This seven member board chaired by the Defense Department's CFO with three Government and three private sector members was established to review and recommend changes to existing CAS standards (Cost Accounting Standards) and to implement new standards for Defense contractors to achieve uniformity and consistency for measurement, assignment, and allocation of costs to DoD contracts.

Section 820 also required DCAA (Defense Contract Audit Agency) to accept the contract auditing work of commercial auditors without further audit. That provision didn't last long as it was eliminated in the 2017 NDAA (Section 804).

The idea of a DCASB (Defense Cost Accounting Standards Board) was essentially a shot at the CASB (Cost Accounting Standards Board) for its inactivity for a long period of time. In fact, from 2011 until after President Trump was inaugurated, the Board did not meet once. That has since changed and it appears the CASB is once again active.

Not too many people thought the idea of a DCASB was a good idea. The Section 809 panel included a recommendation to eliminate it and DCAA forwarded a legislative proposals with that recommendation.

Perhaps the end is near for the DCASB. Section 834 of the Senate version of the 2020 NDAA seeks to repeal 10 USC 190, the Defense Cost Accounting Standards Board. Most likely, this provision will survive the Senate/House compromise committee deliberations.

Monday, September 23, 2019

NDAA 2020 - GAO to Study and Report on DoD's Efforts to Ensure Price Reasonableness

Section 805 of the Senate Version of the 2020 NDAA (National Defense Authorization Act) contains a provision that, if enacted (and it probably will be enacted), requires the GAO (Government Accountability Office) to study and report on the Defense Departments efforts to obtain data from offerors to support the reasonableness of proposed pricing.

Recall the Transdigm case from last June where the contractor paid baqkc $16 million in excessive profits and Congress wants it to pay back an additional $350 million of excessive profits. These excessive profits were a result of Transdigm refusing to provide any cost or pricing support for the items they controlled and sold as sole-source to the Government. The Government, particularly DoD, needed the critical parts, had no bargaining power, and ended up paying what Transdigm demanded.

Is the Transdigm case an isolated event or just the tip of the iceberg? Inquiring minds and Congress wants to know. So they've conjured up requirement to find out. The GAO report must address the following. Item No. 4 will be the most interesting.

  1. the number of, and justification for, any waiver of requirements for submission of certified cost or pricing data for sole source contracts for spare parts issued during fiscal years 2015 through 2019.
  2. the number of and justification for any exception to the requirements for submission of certified cost or pricing data for sole source contracts for spare parts provided during fiscal years 2015 through 2019.
  3. the number of contracts awarded for which a request for cost or pricing data, including data other than certified cost or pricing data, to determine price reasonableness was denied by any offeror at the time of award.
  4. actions taken by DoD if an offeror refused to provide requested data. 

Friday, September 20, 2019

Another Government Agency Finds Deficiencies in its Internal Controls over Employee Travel Card Usage

Do you give out credit cards and travel cards to your employees? If so, how confident are you that your internal controls are working, if you have any internal controls at all? If you're like most small firms, your policies are largely based on trust. But, as you no doubt know, 'trust' is not an internal control. Trust is important in any organization, but it is not an internal control.

The Government is a major user of travel cards but audit after audit show that the Government, with all of its controls and oversight (approvers checking the travelers, managers checking the approvers, and auditors checking the managers) they still have issues and deficiencies in managing their credit/travel card programs.

The Government Charge Card Abuse Prevention Act of 2012 requires OIGs (Office of Inspector Generals) of agencies with more than $10 million in travel card spending to conduct period audits of reviews of travel card programs to analyze risks of illegal, improper or erroneous purchases and payments.

The EPA (Environmental Protection Agency) Office of Inspector General (OIG) recently completed a risk assessment of the Agency's travel card program and decided there was enough risk to merit a full audit. The OIG found employees who had been separated from service with active travel cards. They found irreconcilable differences between transactions and bank records (Citibank records in this case). The OIG found reports with 'blank' columns where data should be listed. They also found that they couldn't determine how much 'credit' was remaining on travel cards.

You might want to read how one highly trusted contractor employee used a company issued credit card to embezzle $825 thousand from his company.

You might also be interested in our article on how to improve controls over credit card usage.

Thursday, September 19, 2019

Improper Business Practices - Gratuities to Government Personnel

This is the third installment in our periodic series on improper business practices as laid out in FAR (Federal Acquisition Regulations) Part 3. FAR Part 3 includes sections on the prohibitions of gratuities to Government personnel, contingent fees, subcontractor kickbacks, buying-in and anti-trust matters. It also offers whistleblower protections to contractor employees, requires contractors to establish and implement codes of business ethics and conduct, and more. In Part 1, we discussed the requirement for contractors and subcontractors to implement reasonable procedures to prevent and detect violations of the Anti-Kickback Act. In Part 2, we discussed the practice of "buying in" and tools for contracting officers to use to prevent subsequent cost growth when contractors do buy in. Today, in Part 3, we will be discussing the prohibition against offering gratuities to Government personnel.

One of the standard contract clauses included in Government contracts is found in FAR 52.203-3, Gratuities. It holds that the rights of contractors to proceed may be terminated by written notice if the Government determines that the contractor (or its agency, or another representative) offered or gave a gratuity (e.g. entertainment or gift) to a Government employee and intended, by the gratuity, to obtain a contract or favorable treatment under a contract. If the contract is terminated under this clause, the Government is entitled to pursue the same remedies as in a breach of contract and to seek exemplary damages (if the contract involves Defense Department funds).

In addition to terminating the contract (or contracts), the Government may also initiate debarment or suspension measures (FAR 9.4). Government employees, under the same FAR provision, are obligated to report such gratuities as well as attempts by contractors to offer gratuities.

Termination, debarment, and suspension is bad enough but the consequences could get much worse for both contractors and Government employees caught exchanging gratuities for favored treatment. As readers of this blog are aware, the Government prosecutes these activities under several different criminal statutes resulting in significant monetary penalties and, in some case, prison time for the practitioners.

Many contractors have established a zero-tolerance policy for gratuities of any amount, including, in some cases, even a complimentary cup of coffee. Many Government employees (particularly audits and contracting officers) have also developed a zero-acceptance of any thing that could even be remotely construed as a gratuity, including refusing an "offered" cup of coffee.

Wednesday, September 18, 2019

Contractor Settles Double Billing Discovery for $1 Million

FAR (Federal Acquisition Regulations) limit the amount of rent or lease costs paid to related parties that Government contractors can claim under their contracts. FAR 31.205-36(b)(3) states that:
Charges in the nature of rent for property between any divisions, subsidiaries, or organizations under common control, to the extent that they do not exceed the normal costs of ownership, such as depreciation, taxes, insurance, facilities capital cost of money, and maintenance, are allowable.
We've written extensively on these limitations in past postings. See, for example, Rent Paid to Related Parties but we continue to find and hear about examples where contractors use bases other than cost of ownership when applying related party rental/lease payments to their Government contracts.

Earlier this month, the Justice Department announced a settlement wherein a Michigan Government contractor (and two of its employees) will pay back $1 million to resolve allegations that it did not comply with this related party rent/lease limitation. In addition, the Contractor and two of its employees are prevented from bidding on federal awards and contracts for the next three years. The company is also required to maintain an ethics and compliance program and retain a Corporate Ethics Monitor to review and report on the company's compliance with Government contracting requirements.

According to the Justice Department, GS Engineering, Inc. (GSE) double-billed the Government by fully depreciating certain data acquisition equipment, charging that depreciation to Government contracts, then transferring the same equipment to a related company at lease rates that exceeded the cost of ownership. A significant cost of ownership on most leased equipment is depreciation. GSE did this for eight years before a DCAA (Defense Contract Audit Agency) audit disclosed the practice and brought it to a halt.

This area is one in which DCAA has identified as a high audit risk area. If you are claiming rental/lease payments on your Government contracts, expect auditor queries into such payments.

Tuesday, September 17, 2019

GSA Price Reduction Clause

When GSA negotiates its 'multiple award schedule' (MAS) contracts, it relies on discounts, terms, and conditions that contractors offer to other customers. This is commonly referred to 'most favored customer' pricing.

However, the negotiated prices stated in a MAS contract are not necessarily fixed for the entire term of the contract. Most MAS contracts (perhaps all MAS contracts) contain a Price Reduction Clause (GSAR 552.238-81) which imposes a duty to report certain changes in its commercial pricing terms. In some cases, the Price Reduction Clause will require contractors to adjust their fixed prices downward.

The Price Reduction Clause specifies two events that will require contractors to reduce their prices. If the contractor later reduces the list price or otherwise revised the price list or offers more favorable pricing, discounts, or terms to another customer, the contractor must also offer the same deal to the Government. The other requires that the discount percentage offered to the Government must be maintained. If the contractor offers the Government a 15 percent discount off of list price, but later lowers its list price, the contractor must offer the Government the 15 percent discount off of the new list price, even if the old Government price is still most favored.

UPS (United Parcel Service) found about this clause the hard way. The Justice Department just announced a settlement with UPS for $8.4 million to resolve allegations that it overcharged Federal agencies for package delivery services under its GSA contract. From 2007 to 2014, UPS failed to follow the Price Reduction Clause of its GSA contract.

MAS contractors need to establish internal mechanisms to ensure that it maintains pricing integrity on its contracts. Without such internal controls, it is too easy to forget about contractually require duties and obligations like the Price Reduction Clause.

Monday, September 16, 2019

DCAA to Triple The Number of Defective Pricing Audits

Bloomberg published an article last week reporting that DCAA (Defense Contract Audit Agency) plans to triple the number of defective pricing audits in the upcoming fiscal year. Defective pricing audits are tests for contractor compliance with the Truth in Negotiations Act (TINA).

According to the article, DCAA intends to complete 60 defective pricing audits in the coming fiscal year.  During fiscal years 2017 to 2019, the Agency completed 26, 21, and 20 respectively. Bloomberg notes that at least two congressional committees are reviewing the Pentagon's enforcement of TINA, a law intended to prevent unjustified profits based on incomplete, flawed or inaccurate cost or pricing data (actually the term "flawed" is not part of TINA. TINA refers to 'current', 'complete', and 'accurate').

Not only does DCAA intended to triple the number of audits it intends to complete but it also plans to quintuple the number of audit hours applied to those reviews.

One of the reasons, besides ongoing Congressional oversight, for the increase in the number of defective pricing audits is the track record of positive audit findings. The former Director for defense pricing noted that during his tenure, 100 percent of the contracts examined at one top-25 defense contractor had 'suspect' defective pricing. And he also added that "If one looks deep enough there is some element of fraud typically lurking". For example:
In a number of cases we expected profit outcomes of 12% to 15% ... but (the auditors) found levels of between 25% and 80% on some sole-source weapons contracts. That does not happen by outstanding performance but by faulty contractor cost estimating or in the worst case, fraud.
Since fiscal year 2015, nearly 75 percent of defective pricing audits have uncovered potential noncompliances with TINA. The amount challenged is almost $600 million (though after the issues are settled, will be something less than that). Ten of those audits have been referred to investigators as suspected irregular conduct and eight of those ten are currently active cases.

TINA applies to negotiated contracts over $700 thousand or $2 million, depending upon when the contracts were negotiated. Competitively awarded contracts and contracts based on commercial item pricing are not subject to TINA. It is likely that DCAA will be concentrating its efforts on the larger Defense contracts; the top 10 or the top 25. If you don't fall in those categories, it is unlikely that your contracts will be selected for audit.

Friday, September 13, 2019

Impartiality Impairments

The standards of ethical conduct for Government employees require that employees take appropriate steps to avoid an appearance of loss of impartiality in the performance of his or her official duties. To do this, the standards require that an employee should not participate in a particular matter involving specific parties with whom they had a covered relationship without prior authorization from the agency designee. Two things in this prohibition require definitions; 'particular matter' and 'covered relationship'.

A 'particular matter' includes, among other things, a contract in which the United States is a party or has a direct and substantial interest. A 'covered relationship' would include a former employer with whom the employee worked for within the last twelve months.

Typically, when we read about violations of ethical standards, it involves a former Government employee who left and went to work for company with Government contracts where that employee had substantial involvement over the negotiation, award, and administration. But it could apply the other way as well - where a contractor employee goes to work for the Government. A recent audit report by the GSA (General Services Administration) Office of Inspector General (OIG) illustrates the later point. The OIG found that GSA and one of its employees violated these standards of ethical conduct.

Northern Management Services has an O&M (Operations and Maintenance) contract with GSA to maintain three Federal buildings in the Ft. Worth, TX area. A project manager for Northern who assisted in preparing cost proposals for the company, left and went to work for GSA, whereupon he participated in negotiating costs for task orders for projects which he had prepared the cost estimates.

The OIG found that this employee had an "impartiality impairment" and that neither he nor GSA took necessary steps to avoid an appearance of loss of impartiality in the performance of his official duties. The OIG ordered GSA to take immediate steps to address the impartiality impairment which presumably (though not stated) would require someone to take a second look at the negotiation process to ensure that the Government's interests were protected.

Thursday, September 12, 2019

Honest Services Fraud

"Honest services fraud" is a relatively new criminal statute added to the federal mail and wire fraud statute in 1988. Persons convicted of honest services fraud have been convicted of a scheme or artifice to deprive another of the intangible right of honest services.

This statute has been most often applied by federal prosecutors in cases of public corruption. The statute is limited to "fraudulent schemes to deprive another of honest services through bribes or kickbacks supplied by a third party who has not been deceived. The traditional mail fraud and wire fraud statutes are limited to schemes that defraud victims of tangible property, including money. Congress added the 'honest services' provision in 1988 to included defrauding victims of honest services. Generally, there are two main areas of honest service fraud; bribery (either direct or indirect) and failure to disclose a conflict of interest resulting in personal gain.

Anthony Daguanno was recently sentenced to a year in prison after pleading guilty to 'honest services fraud'.

The Treasury Department gives cities with blighted areas, money each year to demolish vacant houses. Detroit hired a company called Adamo to help administer the program. Specifically, Adamo assembled bid packages in response to RFPs issed by the City, communicated with subcontractors and kept track of bids submitted. Mr. Daguanno worked for Adamo and was primarily responsible for these tasks.

On numerous occasions, 'Contractor A' paid Daguanno money for disclosing confidential information about competitors' bid; information such as the lowest competitor bid which allowed Contractor A to submit a lower bid, ensuring that it got the contract. Over an eight year period, Daguanno accepted more than $372 thousand in bribes and kickbacks on 71 occasions.

As part of the sentencing, Mr. Daguanno must forfeit the $372 thousand in bribes and pay a $10 thousand fine. Read more about the case in the Justice Department press release.

Wednesday, September 11, 2019

FAR Update for Definition of "Affiliates"

The FAR (Federal Acquisition Regulations) Councils issued an amendment this week to revise the FAR definition of "Affiliates".

FAR 2.101 - The basic definition did not change. It read and still reads:
Affiliates means associated business concerns or individuals if, directly or indirectly either one controls or can control the other; or third party controls or can control both.
The change is the 'exceptions' to the definition. In the old definition, there were no exceptions. In the new definition, there are two:

  1. For the use in subpart 9.4 (Debarment, Suspension, and Ineligibility), see the definition of 'affiliates' at 9.403
  2. For the use in subpart 19.1 (SBA Size Standards), see the definition of 'affiliates' at 19.101. 
The definitions are similar but each take it a step further to detail or give examples of what the word "control" means.
9.403: Affiliates - Business concerns, organizations, or individuals are affiliates of each other if, directly or indirectly, either one controls or has the power to control the other or a third part controls or has the power to control both. Indicia of control include, but are not limited to interlocking management or ownership, identity of interests among family members, shared facilities and equipment, common use of employees, or a business entity organized following the debarment, suspension , or proposed debarment of a contractor which has the same or similar management, ownership, or principal employees at the contractor that was debarred, suspended, or proposed for debarment.
19.101: Affiliates means business concerns, one of whom directly or indirectly controls or has the power to control the others, or a third party or parties control or have the power to control the others. In determining whether affiliation exists, consideration is given to all appropriate factors including common ownership, common management, and contractual relations. SBA determines affiliation based on the factors set for at 13 CFR 121.103
The CFR reference is an extensive list describing how SBA determines 'affiliations'. SBA wants to make very sure that they are not awarding contracts to businesses that are affiliated with large businesses.

Tuesday, September 10, 2019

Summary Judgments - What Are They?

In law, a summary judgment is a judgment entered by a court for one party and against another party without a full trial. Either party can request the court (e.g. the Board of Contract Appeals) for a summary judgment and often times, both parties will make cross-motions for a summary judgment.

In the context of ASBCA (Armed Services Board of Contract Appeals) and civilian agencies Boards of Contract Appeals, motions for summary judgement are evaluated under well-settled standards.

First, summary judgments are properly granted only where there is no genuine issue of material fact and the party that requests the summary judgment is entitled to judgment as a matter of law.

Second, the moving party bears the burden of establishing the absence of any genuine issue of material fact and all significant doubt over factual issues must be resolved in favor of the party opposing summary judgement.

Third, in the course of the Board's evaluation of a motion for summary judgment, its role is not to weigh the evidence and determine the truth of the matter, but rather to ascertain whether material facts are disputed and whether there exists any genuine issue for trial. A material fact is defined as one which may make a difference in the outcome of the case.

Fourth, the opposing party must assert facts sufficient to show a dispute of material fact. To ward off summary judgment, the non-moving party must do more than make mere allegations, it must assert facts sufficient to show a dispute of material fact.

Once these four standards are met, the Board can and does render summary judgments.

Monday, September 9, 2019

Contractor Pays $500 Thousand to Resolve Allegations It Misrepresented its HUBZone Status

HUBZone (Historically Under-utilized Business Zones) is a SBA (Small Business Program) for small businesses that operate it and employ workers living (mostly) in historically under-utilized business zones. To be more specific, HUBZones are metropolitan and rural areas with low income, high poverty rates, and high unemployment rates. The program is now a little more than 20 years old. There are about 2,500 designated HUBZones in the United States. The best way to view them is with SBA's HUBZone Map. HUBZones are periodically added and subtracted from the list.

Other than being a 'small business' with majority ownership by U.S. Citizens, businesses eligible to participate in the HUBZone program must meet two important criteria.

  1. the firm's principal office (the location where the greatest number of employees perform their work, excluding contract sites) must be in a HUBZone, and
  2. 35 percent of the firm's total workforce must reside in a HUBZone.
The Government targets three percent of contracting be set aside for HUBZone qualified contractors. This works out to about $2 billion per year. Based on a study performed a few years back, this program has not had significant economic impact on HUBZone areas (counties, census tracts, and Indian reservations).

Most of the contracts awarded to HUBZone contractors are 'set-aside' by SBA for that purpose and often awarded on a sole-source basis. For companies operating in the HUBZone environment, getting a non-competitively awarded contract offers unique financial opportunities.

But there are some companies that have abused the system. MASS Service and Supply is one that recently came under scrutiny for falsifying records to show that at least 35 percent of its workforce resided in a HUBZone. Before the falsification of employee residences was discovered, MASS had been awarded several HUBZone set-aside contracts. MASS even went so far as to falsify spreadsheets to show fictitious employee addresses to give to Federal investigators. That wasn't too smart as it would not be particularly challenging for an investigator to confirm employee addresses.

MASS agreed to pay $500 thousand to resolve the False Claims Act (FCA) allegations that the company misrepresented its HUBZone status and lied to Federal investigators. That probably wiped out most of the company's profits earned under the HUBZone contracts. 

Friday, September 6, 2019

Prison Time for Selling Non-Conforming Parts to the Government

The owner of two companies with defense contracts will now spend the next three years in Federal prison and must also pay $8 million in restitution for selling non-conforming parts to the military for use on fighter jets and helicopters. Mr. Sobrado was convicted of a number of charges including conspiracy to commit wire fraud, conspiracy to violate the Arms Export Control Act, and income tax evasion but the root cause that precipitated all of these charges was selling non-conforming parts to the Government and certifying that they met contractual requirements.

According to a Justice Department press release announcing this sentencing, the particular contracts specified that the parts in question were critical application items for military equipment, including fighter jets and helicopters. Additionally, the contract required that these parts be purchased from one of a small group of 'authorized manufacturers'. Mr. Sobrano found local manufacturers to supply non-conforming parts at significantly reduced cost. As a result, Mr. Sobrano made windfall profits, some of which was not reported for income tax purposes.

Another aspect to this case was Mr. Sobrano's application to DoD for access to export controlled drawings and technical data on behalf of a family member's company. Access was to be restricted to U.S. Citizens and to those lawfully in the United States. The family member in question was in the United States illegally but was able to access and download hundreds of drawings that were sensitive in nature and that required special access.

Thursday, September 5, 2019

Self-Disclosure Law - Contractor Returns $2.6 Million to the Government

Last month, we posted an article about the requirement for contractors with "credible evidence" of violations of criminal law, violations of the False Claims Act and significant overpayments on Government contracts to self-disclose that evidence to the Office of Inspector General (OIG). The Defense Department's OIG had just reported that over the ten years since inception of that law, Government contractors had returned more than $200 million to the Government based on these mandatory disclosures. (See DoD Contractors Return $200 Million to Government through Mandatory Disclosure Program).

Well, DoD just added another $2.6 million to that total.

Yesterday, the Justice Department announced that it had reached agreement with a Defense contractor in New York after it self-disclosed over-billings to the Government and to its prime contractors.

The contractor, Arkwin Industries, detected errors in its accounting system that resulted in double-counting worker hours spent performing inspections of its products. Arkwin then self-disclosed the discovery to the Government and then undertook an internal investigation using the outside services of a forensic accounting team. After concluding its investigation, Arkwin reported its findings to the Government.

After receiving Arkwin's findings, the Government made its own independent investigation including a determination of whether the over-billing had been intentional or accidental. Arkwin cooperated fully throughout the investigation, providing documents, making witnesses available for interviews and responding to Government inquiries. Following this investigation, the Government concluded that the over-billing was accidental and negotiated the $2.6 million settlement.

This resolution demonstrates how the self-disclosure process should be working, according to the Justice Department. "When a Government contractor self-discloses billing errors and cooperates in the Government's investigation, (the Government) will work with them to arrive at a fair and just resolution".

Wednesday, September 4, 2019

Improper Business Practices - "Buying-In"

Last week we began a series on improper business practices as defined in FAR (Federal Acquisition Regulations) Part 3. FAR Part 3 includes sections on the prohibitions of gratuities to Government personnel, contingent fees, subcontractor kickbacks, "buying in"and anti-trust matters. Specific to contractors and subcontractors, FAR Part 3 covers whistleblower protections to contractor employees, requires codes of business ethics and conduct, and prevention of personal conflicts of interest for contractor employees performing acquisition functions. Its also the section that we discussed in Part 1 of this series that requires contractors and subcontractors to implement reasonable procedures to prevent and detect violations of the Anti-Kickback Act. If you missed that post, you should go back and read it.

Today we will be covering the practice of "buying-in"

Buying-in as used in FAR 3.501 is the practice of submitting an offer below anticipated costs, expecting to either increase the contract amount after award (e.g. through unnecessary or excessively priced change orders) or receive follow-on contracts at artificially high prices to recover losses incurred on the buy-in contract.

The practice of buying-in can decrease competition or result in poor contract performance.

FAR does not prohibit contractors from buying-in. But it does caution contracting officers to ensure that buying-in losses are not recovered by the contractor through the pricing of change orders or follow-on contracts subject to cost analysis. FAR lists several safeguards that contracting officers should use to minimize the opportunity for buying-in:

  1. Contracting officers should seek a price commitment covering as much of the entire program concerned as is practical by using multiyear contracting with a requirement in the solicitation that a price be submitted only for the total multi-year quantity or priced options for additional quantities that, together with the firm contract quantity, equal the program requirements.
  2. Contracting officers should perform cost or price analysis to develop a negotiation position that permits the parties to reach agreement on a fair and reasonable price (see FAR 15.405).
Contractors and subcontractors might have valid reasons for buying into a program besides making up the losses on change orders and follow-on work. SBIR (Small Business Innovative Research) contracts are often 'loss' contracts but contractors are willing to take the contract(s) because it represents Government funding on research the contractor planned or desired to do anyway.

Its almost impossible for the Government to determine whether a contractor is "buying-in" to a contract. But contracting officers are not naive and can often sense when such a practice might lead to much higher costs in the long run.

Tuesday, September 3, 2019

When Will You Exceed 75 Percent of Contract Funding? Why Does it Matter?

Accounting systems for Government contracting must meet many requirements that are not necessarily needed to properly account for costs under commercial work. Most of these requirements are centered upon cost accounting - accumulating costs by contract, recording time by contract, establishing indirect rates to apply to direct costs by contract, etc. - as opposed to financial accounting.

There is one criteria that most new and prospective contractors and subcontractors have difficulty understanding and implementing. It shows up as Item 3.a on the SF 1408, Pre-Award Survey of Prospective Cotnractor - Accounting System, or Item 18 on DCAA's (Defense Contract Audit Agency) Preaward Accounting System Adequacy Checklist and Item (c)(15)(i) of the DoD FAR Supplement Clause 252.242-7006 and it requires contractors to notify the contracting officer when it is about to run out of money on cost-reimbursable contracts.

Specifically, contractors (and subcontractors) performing under cost-reimbursement Government contracts are required to notify the contracting officer, in writing, whenever they have reason to believe

  • the costs the contractors expect to incur under the contracts in the next 60 days, when added to all costs previously incurred, will exceed 75 percent of the estimated cost of the contract, or
  • the total cost for the performance of the contracts will be greater or substantially less than estimated.
Consider, for a moment, the data and accounting information necessary to comply. First, lets point out that no accounting system, except very expensive systems catering to Government contracting, costing hundreds of thousands of dollars to license and implement, is capable of providing this information. So if you're using QuickBooks or another entry level accounting system, you will need to augment it with will something else. Most contractors use Excel.

Obviously to project what costs will be in the next 60 days will require some sort of budgeting or forecasting system. This is where a lot of contractors fail - they do not perform budgeting. Some contractors will look at their historic 'burn rate' and project off of that. That usually results in imprecise estimate and moreover, its not necessarily tied in to the accounting system.

The other data point to the required analysis is 75 percent of the funded amount. It is surprising the number of contractors and subcontractors who haven't bothered to calculate this number. Without it, there is no means of determining whether contract costs will exceed that number in 60 days.

If you need some assistance in setting up a system to comply with this accounting system requirement, give us a call.


Friday, August 30, 2019

Contractor Pays $940 Thousand to Settle False Claims Allegations

FAR (Federal Acquisition Regulations) 31.201-5 is a succinct statement on how Government contractors need to account for income derived from their Government contracts. It reads: "The applicable portion of any income, rebate, allowance or other credit relating to any allowable cost and received by or accruing to the contractor shall be credited to the Government either as a cost reduction or by cash refund. We've discussed this provision before. See for example, this one from 2010 or a somewhat related one from 2015. Examples of credits that should be deducted from costs charged to the Government might include prompt payment or cash discounts, airline refunds, sales of scrap, and tax refunds (e.g. state income taxes that are allowable under Government contracts).

But what happens if a contractor does not give the Government back its allocable share of credits? Here's a recent case where a contractor did not pass along discounts. A whistleblower took notice and filed a False Claims Act lawsuit. The Government enjoined and a settlement was just reached where the contractor agreed to pay $940 thousand (of which the whistleblower received $160 thousand).

International SOS is a provider of overseas healthcare services for the Government. Among the services it provided was aeromedical evacuations which, since it did not have its own aircraft, subcontracted with other companies. For more than four years, up until 2017, International SOS billed TRICARE for the full cost of these aeromedical evacuations. Unknown to the Government however, International SOS negotiated discounts from its third-party air ambulance providers. It should have passed those discounts  back to the Government but didn't. The company billed the full non-discounted cost to TRICARE.

We should also note here that failure to disclose the discounts could also result in defective pricing, i.e. violations of the Truth in Negotiations Act if the available discounts were not disclosed during contract negotiations.

Thursday, August 29, 2019

Improper Business Practices - Subcontractor Kickbacks

FAR (Federal Acquisition Regulations) Part 3 is the source for information and guidance necessary to ensure the integrity of the Government's procurement system. It not only applies to Government agencies and employees but to contractors and subcontractors as well.

It includes sections on the prohibitions of gratuities to Government personnel, contingent fees, subcontractor kickbacks, "buying in"and anti-trust matters. Specific to contractors and subcontractors, FAR Part 3 covers whistleblower protections to contractor employees, requires codes of business ethics and conduct, and prevention of personal conflicts of interest for contractor employees performing acquisition functions. Its also the section that requires contractors and subcontractors to implement reasonable procedures to prevent and detect violations of the Anti-Kickback Act.

Over the next few posts, we will be examining some of these "improper business practices" with the idea that Government contractors and subcontractors will be in a better position to assess their own policies and procedures for compliance with the standards set by procurement regulations. We begin with the coverage in FAR 3.502, Subcontractor Kickbacks.

The term 'kickbacks' shouldn't really need to be defined - everyone knows intuitively what they are. But FAR includes a definition:
... means any money, fee, commission, credit, gift, gratuity, thing of value, or compensation of any kind ... for the purpose of improperly obtaining or rewarding favorable treatment ...
Under FAR 52.203-7 (and its statutory basis at 41 USC 87), any person (including legal entities) are prohibited from

  1. providing or attempting to provide or offering to provide any kickback
  2. soliciting, accepting, or attempting to accept any kickback, or
  3. including, directly or indirectly, the amount of any kickback in the contract price charged by a prime contractor (or any level of subcontractor)

But the clause has other pro-active aspects. It requires contractors and subcontractors it have in place and follow reasonable procedures designed to prevent and detect possible violations of the anti-kickback prohibitions in its own operations and direct business relationships.

Procedures designed to prevent and detect kickbacks in an organization are not so obvious or easy to implement. Based on our experiences with many contractors, most of them have not implemented policies and procedures designed to detect and prevent kickbacks. Have you?

Wednesday, August 28, 2019

A Compendium of Labor Department Settlements with Government Contractors

The Department of Labor's Wage and Hour Division (WHD) and its Office of Federal Contract Compliance Programs (OFCCP) have been posting a lot of investigation results lately. We don't know how many investigators and auditors are employed there but there must be many based on the number of audits/investigations they're completing.

The WHD investigates contractor and subcontractor compliance with prevailing wage statutes such as the Davis-Bacon Act and the Service Contracting Act. The OFCCP focuses on contractor and subcontractor compliance with federal prohibitions against discriminatory hiring and promoting practices. Both the WHD and the OFCCP initiate their own randomly selected audits but also respond to hotline complaints, congressional inquiries, and other allegations of impropriety.

Monday, the OFCCP announced a settlement with Cintas Corp for $424 thousand because Cintas allegedly discrimnated against female production workers with regard to their compensation and discriminated against black and make applicants for garment inspector/hanger positions and against minority applicants for service sales representative positions.

Also Monday, the WHD announced a settlement with Lockheed Martin for $327 thousand for alleging classifying some employees as exempt from FLSA  overtime requirements. Lockheed also violated the record-keeping requirements of the FLSA.

A week ago Tuesday, the WHD announced a settlement of $1.3 million in back wages for 1,8534 employees to resolve alleged violations of the prevailing wage acts. These employees were engaged in disaster recovery efforts in Puerto Rico. The contractor failed to pay overtime.

Yesterday, the WHD announced a settlement with an electrical contractor working on a VA (Veterans Affairs) construction project. WHD found that the contractor had exceed the journeyman to apprentice ratio and should have classed some of the apprentices as journeymen. That cost the contractor $37 thousand.

It is very difficult for small contractors to know, understand, and implement the myriad labor regulations on the books just like its difficult for small contractors to know and understand procurement regulations. Contractors need to know what they're signing up to before entering into federal contracting.

Tuesday, August 27, 2019

Regulations Must Be Changed for the Government to use Email Instead of Regular Mail

The Government is proposing to amend its regulations in order to issue task orders or delivery orders to contractors via email. Right now, those must be mailed.

In today's business environment, the Government and federal contractors frequently use email or other electronic commerce methods to communicate with one another. In an effort to reflect current business practices and maintain speed and efficiency in the ordering process, the FAR (Federal Acquisition Regulation) Council is proposing to update a clause that requires contracting officers to use regular U.S. mail to issue task or delivery orders (unless specifically authorized in the contract to use electronic commerce or fax). If the proposed change is implemented, contracting officers will have the flexibility to use email, fax, or regular mail without special contract coverage to use other than regular mail. It seems unlikely that anyone (other than health professionals) use fax machines these days but leave it to the FAR folks to finally authorize fax machines as a means of issuing task and delivery orders.

The new provision also clarifies the date when a task or delivery order is considered "issued".

  1. If sent by mail, a delivery order or task order is consider issued when the Government deposits the order in the mail.
  2. If sent by fax, a delivery order or task order is considered issued when the Government transmits the order to the contractor's fax number.
  3. If sent electronically, a delivery order or task order is considered issued when the Government either
    • Posts a copy of the delivery order or task order to a Government document access system and notice is sent to the contractor, or
    • Distributes the delivery order or task order via email to the contractor's email address.

Contractors need to ensure their proper 'company' email in SAM (System for Award Management)

The proposed regulation can be found here.